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2017 | OriginalPaper | Buchkapitel

5. Monetary and Other Financial Policies for Africa’s Structural Transformation

verfasst von : Hopestone Kayiska Chavula, Mamo Girma Tefera, Abbi M. Kedir, Yesuf M. Awel

Erschienen in: Macroeconomic Policy Framework for Africa's Structural Transformation

Verlag: Springer International Publishing

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Abstract

This chapter looks at the role of monetary policy in enhancing Africa’s structural transformation. It emphasizes for monetary policy to go beyond the basics of stability to implement monetary policy frameworks that better anchor inflation and promote macroeconomic stability as well as growth. This being the case, the chapter advocates for the implementation of strategies towards the implementation of frameworks that could create room for discretionary changes in monetary policy to accommodate shocks hitting the real economy, impacting on output and growth, hence the countries’ structural transformation. The chapter calls for some important policy insights to properly undertake exchange rate policies, taking into consideration potential trade-offs between inflation and exchange rate based on country-specific characteristics. It stresses the need for African countries to be cautious in accessing non-concessional debt (e.g. sovereign bonds) which might lead to unsustainable levels of debt. The chapter also recognizes that the absence of deep and efficient financial markets constrains Africa’s economic growth and transformation. Overall, ensuring central bank independence, effective management of inflationary pressures and improving policy coordination between monetary and fiscal policy would lead to better macroeconomic management in the continent and enhance its structural transformation process.

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Vorheriges Kapitel Fiscal Policy, Long-Term Growth and Structural Transformation in Africa

Nächstes Kapitel Selected Sectoral Policies and Structural Transformation in Africa

The eurozone and the CFA franc zone are considered as best examples of fixed exchange regime. The CFA franc zone in Africa consists of 14 African countries which belong to two separate economic and monetary unions, WAEMU and CAEMU with two separate banks. The CFA franc pegged to the euro at the same fixed parity is commonly used among members. Four fundamental principles lie behind this monetary cooperation/union: fixed exchange rate parity between the CFA franc and the euro; unlimited guarantee from the French Treasury for full convertibility of the CFA franc into the euro; half of the reserves needs to be deposited in an operation account at French Treasury; and free movements of capital between France and the CFA zone as well as within the CFA zone.

According to Bleaney and Tian, managed floating has been spited into “floats” and “Other managed arrangements” since 2009.

See IMF (April 2014) for more details on the macroeconomic policy framework against the exchange rate arrangement as of 2014.

As this estimation demands strongly balanced panel and time variables, only countries with full data throughout the period were included: Algeria, Botswana, Burkina Faso, Burundi, Cabe Verde, Cameroon, CAR, Chad, Congo, Egypt, Equatorial Guinea, Gabon, Gambia, Ghana, Kenya, Lesotho, Mauritius, Morocco, Mozambique, Namibia, Nigeria, the Seychelles, Sierra Leone, South Africa, Tanzania, Uganda and Zambia.

The random effect model is preferred to fixed effect model based on the Hausman test. The model specification and other test results are not reported here just to save space.

In a separate estimation on the determinants of inflation, we also find that fixed exchange rate regime and inflation are negatively and significantly (5 per cent level, –2.626**) related. Perhaps, this may suggest that countries pursuing fixed exchange rate tend to benefit from lower level of inflation. Although not significant, the positive relationship between floating exchange rate regime and inflation was found. To save pages, the discussion on determinants of inflation is left out.

The year 1994 witnessed unusually higher level of inflation exceeded 30 per cent across countries in the CFA franc zone. The higher inflation across the zone was due to the devaluation of the franc (since 12 January 1994), doubling the party rate of 50 CFA francs per French franc to 100 CFA francs per French franc.

We used panel VAR model based on GMM estimation to test Granger causality between exchange rate and inflation. We presents only the results of the panel Granger causality tests, just to save space. The normality tests, panel unit root tests, the model specification and other related estimation results are presented in Annex 5.

The panel VAR is estimated by using the updated Stata package provided by Abrigo and Love. This pvar Stata package is used in Abrigo and Love (2015), Estimation of panel vector autoregression in Stata: A package of programs.

The countries that require urgent attention are Chad, Eritrea, Somalia, Sudan and Zimbabwe.

Lending rate is the rate charged by banks on loans to the private sector, and deposit interest rate is the rate paid by commercial or similar banks for demand, time or savings deposits.

Average market capitalization is calculated as the average of the end-of-period values for the current period and the previous period.

According to Čihák et al. (2012), the bank Z-score captures the probability of default of a country’s banking system. The Z-score compares the buffer of a country’s banking system (capitalization and returns) with the volatility of those returns. It is computed as follows: Bank Z-score=[Return on Assets+(equity/assets)/(standard deviation of Return on Assets)].

During booms, firms and households earn better incomes that also translate into the positive performance of the financial institutions. While during busts, firms and households are likely to default on their credit that deteriorates the asset quality of financial institutions, hence poor performance of financial institutions.

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Titel: Monetary and Other Financial Policies for Africa’s Structural Transformation
verfasst von: Hopestone Kayiska Chavula
Mamo Girma Tefera
Abbi M. Kedir
Yesuf M. Awel
Verlag: Springer International Publishing
Buch: Macroeconomic Policy Framework for Africa's Structural Transformation
Print ISBN: 978-3-319-51946-3

Electronic ISBN: 978-3-319-51947-0

Copyright-Jahr: 2017
DOI: https://doi.org/10.1007/978-3-319-51947-0_5